Essay: Business and financial performance of organization

Part 1 – Project objectives and overall research approach

1.1 Reason for selected topic and organisation:

The topic I chose for my research and analysis project was the topic # 8 of the topics provided by the Oxford Brooks University (OBU) in its latest April 2009 latest information pack. The subject of the topic was “The business and financial performance of an organization over a three year period” The reason for the selection of this topic was based on my interest and interpersonal analytical skills in financials area. I find myself confident in evaluating figures interestingly and easily. It also related to the major part of my ACCA studies that helped me also in my studies.

There was not such a strong reason for the choice of my selected company, but I always find myself having good interest in industries and especially cement industry. As I had a good interest in analyzing figures so analyzing an industry’s figure was more interesting to me by which I could also have a good knowledge about this industry that will help me in future for my career path. Therefore I chose cement industry and Fauji Cement Company Limited as a company for my research and analysis project. This topic could develop good skills in me to analyze, understand and get to know the financial environment and matters of the finance and business normally faced by the companies.

My research and analysis project is based on the evaluation of the three years period of the Fauji Cement Company Limited from July 01, 2004 to June 30, 2007, as recommended by the Oxford Brooks University’s Guidelines. (255)

1.2 Aims and objectives:

The aims and objectives of my research and analysis project were to evaluate the Company with its business performance and financial position. To evaluate the business performance I was aimed to evaluate its standing in the market as compare to its competitors, its ongoing progress, its contribution to the industry and economy of the country in broad. To analyze the financial position of the company first of all I was aimed to assure about its going concern status and business and financial sustainability. I also aimed to consider its progress and growth over the years in its financial strength. SWOT analysis was taken to evaluate the company’s strengths and weaknesses and opportunities and threats it has or will face in the market. I also tried to object my report in context of risks it faces in the market and the diversified effects it that the market has over the company. (150)

1.3 Research and Analysis approach:

As a part of planning I made a draft research and analysis approach before starting on my research work. This approach proved very helpful in scheduling my time and tasks respectively.

I used guidelines provided by Oxford Brooks University in its latest April 2009 latest information pack consistently in my research work and even started form it. First of all I had to select the topic and I used one of the standard topics provided by OBU’s guidelines. I also concerned with my mentor about the topic and after confirming it I selected the suitable company for research work. At this stage I had a lot of choices but I selected the industry in which I had good interest so I work on it interestingly. Gathering information and data and selection of reliable and relevant sources was itself a time taken job due to bulk of its availability and then to manage it in a symmetry order. Meetings with my mentor were an ongoing task and I scheduled it at the convenience of my mentor but at the stage of my research work as recommended by the OBU. I took meetings seriously because it was an effective guiding path towards the progress of my research work and its input was valuable for my project. I also gave meetings a good consideration because my performance was timely and effectively reviewed. I was also required to present my work to the mentor to develop and show my existing skills to the audience. In the last meeting I presented my work to my mentor.

Though, making a draft research approach at the start of the work was a very difficult task due to uncertainties but it overall showed me a lighting path where I could walk somehow easily and could find better turns. (300)

Part 2 – Information gathering and accounting/business

2.1 Sources of information:

In general, sources of information can be categorized into two broad headings that are primary sources of information and secondary sources of information. Primary sources of information allow the learner to access original and unedited information. A primary source requires the learner to interact with the source and extract information. Secondary sources are edited primary sources, second-hand versions. They represent someone else’s thinking or work; e.g. books, articles, magzines, etc. [http://www.graphic.org/resources.html]

I used only secondary sources of information, as I was unable to conduct meetings with the relevant staff of FCCL to get information directly from them due to quarterly audit period that was being undertaken at the time of my gathering information task and also due to workload pressure upon the FCCL’s personnel and data security issues where their management did not allow me conduct such which were barriers for the primary source of information. However I had short of time to gather all the information and therefore I skipped this source of information and tried my best to gather all information elsewhere using secondary sources. (177)

a) Secondary Sources:

The methods I used to gather information were as follows:

• Company Accounts and Reports: I collected FCCL’s annual audited accounts and reports from the company’s website. All other information about the company’s plant information, manufacturing processes, marketing, products, quality and news and updates were also available on the company’s website. Information and data about FCCL’s competitors were also gathered from their registered websites. I also gathered the hardcopies of the Companies annual audited reports from the Stock Exchange, for the periods under review, to make my information more reliable.
• Internet: Internet proved the best suitable method of secondary source in gathering information and data. I gathered comprehensive information about the company and the cement industry. Information about the competitors and Economy of Pakistan was also taken from their individually registered websites.
• Third Party channel of Information: My discussions with my mentor also proved a good channel of gathering information about the industry and economy as a whole. He told me the issue faced by cement industry and its history somehow. I utilized his knowledge to make me know how about the industry and economical matters in broad. He also explained me the manufacturing process of cement industry but I received company’s specific manufacturing process from company’s website.
• Business Magazines & Articles: Business magazines were also reviewed for latest market and industries information. Some online articles were also available specific to the industries and companies that were really helpful containing market analyst’s work and views.
• ACCA Magazines: ACCA Student Accountants helped me in areas of my planning techniques, report writing techniques, analysis methods, analytical skills and also the skills about gathering information, summarizing and presenting it.
• Text Books: ACCA books were referred to get some information about financial ratios, analytical techniques, methods of analyzing business performance and presentation methods and techniques. (306)

2.2 Limitations and ethical issues in Sources of information used:

The major limitations in my sources of information used were data reliability and accuracy. As I used only secondary sources of information, methods I used to collect information and data had its limitations. Most of the information and data about the company and industry was taken from websites where its reliability collapses due to intermediary channels. Though information and data about the company on its website is considered to be accurate and reliable but somewhere it suffers limitations issue as it was not sure whether the information data provided on websites were updated. However to the possible extent I cross checked all the information from other methods of secondary sources as well for its reliability and accuracy, though these other methods have its own limitations. However the figures were considered to be reliable that were taken from hardcopies of the company’s audited accounts and reports. All other methods of gathering information and data had the same limitations problem.

There were two ethical concerns in gathering and using the information and data of the company, its competitors and other general information about the industry. Firstly, though the sources of information i used were not very strong to collect any secret or sensitive information but still i had to be very conscious about this task so not to account for and disclose any information that is sensitive to the company or industry as a whole. My discussions with some professionals could be the source of such sensitive information and data. Secondly, I had to confident about the reliability of information and data I collected because I was going to disclose it and use it for my research work over which all my analysis and conclusions were going to be based and using wrong information and data for some professional assignment itself has an ethical concern. However i took all these tasks with deep concentration and confirmed the type and nature sensitivity of information and data that should not to be disclosed and cross referenced all the information and data from other methods of my information source. (344)

2.3 Accounting and Business techniques used:

There are so many methods to evaluate and analyze the business and financial position of a company but for my research work I had to use specific and relevant methods that could lead me to the required results. However I used some most commonly and widely used method to evaluate the business and financial performance of FCCL.

I used ratio analysis to analyze the financial position of the company mostly in terms of percentages, to represent growth or fall in, which is more easy to understand Risk analysis was undertaken to analyze the types of risk that the company faces and methods of how it mitigates these risks, SWOT and Porter’s five forces analysis were also undertaken to clear the picture of market affects on the company’s business and position in the market. Though FCCL is being evaluated and compared within its three years internal performance it also has been compared with its major competitors, which are Lucky Cement Limited (LCL), D.G. Khan Cement (DGKC) and Maple Leaf Cement Factory limited (MLCFL) for the current financial year 2007. (178)

Part 3 – Results, analysis, conclusion, and recommendations

3.1 The Company

3.1.1 Company Profile

Fauji Cement Company Limited (FCCL), a group company of Fauji Foundation, is a public limited company incorporated in Pakistan on 23 November 1992 under the Companies Ordinance, 1984. The Company commenced its business with effect from 22 May 1993. The shares of the Company are quoted on the Karachi, Islamabad and Lahore Stock Exchanges in Pakistan. The principal activity of the Company is manufacturing and sale of ordinary Portland cement. The Company’s registered office is situated at Aslam Plaza, Adamjee Road, Rawalpindi. Fauji Foundation holds 45.8% of the Company’s ordinary shares.

FCCL is one of the largest cement-manufacturing units in Pakistan with annual production capacity of 1.165 million tons of cement. FCCL has Ordinary paid up capital of PKRs.3.707 billion (370.743 million shares @ Rs.10 each) and Preference paid up capital of PKRs.486.992 million (48.699 million preference shares of Rs. 10 each). (142)

3.1.2 FCCL’s Products:

FCCL produces only Portland Cement (OPC) with the specifications of Clinker 94-95% and Gypsum 5-6%. It has 28 days strength up to 8000 P.S.I and fineness up to 3100 cm2/gm. The Cement qualifies for ASTM-C-150-Type I and EN-197-1, Strength Class 42.5 N and is also BIS certified under Indian Standard. IS-8112:1989 OPC 43 Grade. (54)

[http://www.fccl.com.pk/main/index-4.html]

3.1.3 Manufacturing Process:

Cement is manufactured from 75-80% limestone and 20-25% Clay, or from raw materials containing the same chemical constituents. The raw materials are quarried and crushed, after which they are mixed in the correct proportions. The raw mix is then ground in a raw mill and subsequently burned in a rotary kiln at a temperature around 1450 °C. The raw materials undergo a number of complex chemical reactions in the burning phase and leave the kiln as cement clinker, consisting of agglomerate of clinker minerals. Finally the clinker ground to a fine powder cement in a Cement Mill, together with 4-6% gypsum. The gypsum serves to retard the setting time of the cement, which would otherwise harden, immediately with the addition of water.
FCCL is using dry process to manufacture cement in the dry process the raw mix is ground totally in dry condition, and it leaves the mill and enters the kiln as a powder called raw meal. In order to dry all moisture from the raw materials the raw mill is air swept with hot kiln gases or with hot air from an auxiliary furnace.

FCCL is committed to protect the Environment by continual Improvements to comply with environmental legislation and other Requirements by adopting well established Environmental Management System in its process leading to manufacture of Ordinary Portland Cement. (221)

3.2 Industry Overview:

For the last many years, cement producers, under the banner of All Pakistan Cement Manufacturers Association, have worked with mutual understanding in terms of capacity utilization and pricing. This arrangement has been beneficial to the industry owing to reduced price competition, ensuring a relatively high level of margins. In the past, though the arrangement has weakened at times mainly due to attempts of one producer or the other to achieve higher capacity utilization, such disruptions was usually temporary. This is reflected in high profitability of cement companies in recent years, particularly in FY05 and FY06. Another factor limiting any downward competitive pressure on prices in these years was the low demand/supply gap.

With additional capacities, increasing the supply surplus, the sector has experienced weakening of the “cartel” arrangement. Since the beginning of FY07, cement prices have witnessed a volatile pattern. In an attempt to achieve higher capacity utilization, cement producers, at times, have taken end-consumers prices to less than PKR 200/bag during FY07, severely impacting margins. The impact was more pronounced in North zone due to significant new capacities.

Going forward, though the growth in domestic demand is likely to be maintained, it is unlikely to compensate for the emerging capacity overhang. Moreover, with a few players commanding major share and new capacities coming on line, it is unlikely that cartel type arrangements even if put in place are sustainable. Moreover, changing dynamics in the industry also favour large players mainly due to cost efficiency. In this scenario, the only respite to the industry woes lies in exploring export potential. In this regard, the recent development regarding prospects of exports to India and Middle East region are likely to reduce the cement industry’s business risk to some extent in the near-term and is expected to have a positive impact on the local market in the shape of price stability. (309)

The Cement Industry witnessed an unprecedented demand for its product during Fiscal Year 2006-07. Total cement dispatches stood at 24.22 million tons which is the highest figure ever achieved by the Cement Industry. It reflected a record growth of 31.56 percent over 18.4 million tons of sales during last Fiscal Year. Whereas, local demand grew by 24.4 percent over last year, the exports witnessed a strong and healthy growth of 112 percent to an all-time high level of 3.188 million tons in the wake of rising international demand, as compared to 1.5 million tons during the last year. During the year under review, the capacity utilization stood at 80% as compared to 88% of last year. The reduction was mainly attributed to start up of new lines of production which had increased the capacity from 24 mtpa to 33.4 mtpa. At the end of Fiscal Year 07, per capita cements consumption in Pakistan increased by 11.961 % to 131 Kg as compared to 117 Kg in Fiscal Year 06. (169)

3.3 Analysis:

3.3.1 Ratio Analysis

Ratios convert figures into percentage terms that are easier to understand by a layman. Ratios are calculated by comparing operating and financial figures to view the performance measures of a company in understanding form. For my research and analysis project I used following categories of ratios.

• Sales and Production
• Profitability and Returns
• Liquidity and Working Capital
• Long-term Solvency
• Shareholders’ investment ratios

Sales & Production:

Production measures represent the capacity of the company to produce finished goods for sale to its customers and Sales generates the revenue. Both represent performance of the company in term of its production capability and generation of revenue respectively. Therefore I used this information to analyze the business performance of the company and its level of effects on its financials.

Financial Year (FY) 2006 proved pretty good for the company when it achieved excellent results in its history. The highest sales, production, profitability and other financial figures were achieved in this year. Sales and production increased by 50.65% and 20.41% in FY’06 as compare to the FY’05. However in FY’07 the company’s results again declined dramatically. Though the production increased by 6%, Sales were recorded by 19.20% decrease from FY’06.

FCCL’s results were also recorded lower than the industry’s average and in FY’07 it recorded 39.03% and 42.57% lower net sales and production respectively.

The two major factors for the radical change in these three financial years were the change in cement prices and government levies. FY’07 was the year of price war in which the companies were surviving only with its high production capacity with full utilization and with high volume of sales, as the cement consumption in Pakistan increased by 11.961% as compared to FY’06. Though the company’s capacity utilization stood at 98.08% as compare to 91.48% in FY’06 and the production and sales dispatches increased also but it could not snatch the market from other major players in the market with high production capacity and in result the cut in price affected badly on FCCL’s total sales in FY’07. Excise duty was also increased by the government in FY’07 that also affected its net sales figure. However it can be said that the company’s performance did not reduce but the other industrial factors affected the company’s results in financial terms. However with the installation of expected new line with 7200 tons per day clinker will somehow overcome this deficiency in sales, but the commercial production with this line will start in 2010. (345)

Profitability and Returns:

Profitability and returns represents the company’s earnings from its sales and returns from the utilization of its resources. This is an important category of financial ratios as only a profitable company with good returns considered to be standing company in the market with good prospectus.

Gross profit margin of the company took the same effect from the change in sales trend in FY’06 and FY’07. In FY’06 it was recorded PKR 2,191 million (51.12%) with 34.49% increase from FY’05 where It was amounted to PKR 1,082 million (38.01%) and in FY’07 it again declined to PKR 1,091 million (31.52%) with 38.34% decrease from FY’06. Same effects were taken by the after tax margin and where in FY’06 it was recorded PKR 1,204 million (28.08%) with 56.52% increase from FY’05 where it was amounted to PKR 510 million (17.94%) and in FY’07 it again declined to PKR 646 million (18.66%) with 33.55% decrease from FY’06, owing to reduction in cement prices and higher manufacturing cost. In FY’07 when sales figures were in up and down trend the cost of sales were gradually increasing and was one reason that when in FY’07 sales decreased due to reduction in prices the cost of sales were not affected and reduced the gross profits

Returns of the Company were also suffered by the level profits and Return on Assets (RoA) was recorded 10.1% and Return on Equity (RoE) was recorded 17.3% in FY’07. These results were 47.99% and 52.81% lower than the FY’06 but showed good results as compare to industry average results with 191% and 90.37% higher respectively. It tells that the company’s is utilizing its resources very effectively and getting good returns from it even in the times of downturn in cement prices.

Asset Turnover also took effects from the change in company’s sales figure and total assets and showed same up and down trend where it was recorded 0.54 times with 21.58% lower than in FY’06. However as compare to industry average the results of the FCCL were again strong and recorded 44.40% higher results. [Appendix I, Financial Ratios & Appendix II, Graph-2, 3](343)

Liquidity and Working Capital:

Liquidity refers the ability of an investment or asset to be quickly converted into cash. Working Capital (also called liquid capital) means a measure of both a company’s efficiency and its short-term financial health.

Current ratio measures the company’s existing short-term resources to meet its short-term obligations falling due within one year. Current ratio of FCCL showed increasing trend over the three years’ time period. Normally 1:1 ratio is considered to be optimum, though varies in industries and companies bases on other situations. In FY’07 current ratio of the company was recorded 1.35:1 against 1.25:1 in FY’06 and 0.92:1 in FY’05. The figures demonstrate that in FY’07 the current assets of the Company increased 12 times in terms of advances, deposits, prepayments and other receivable. However it was lower than the industry average where it was recorded at 1.45:1 but all the figures were reasonable to the industry. Same trend adopted by the acid test ratio where stocks are excluded for the calculation ready cash items. In FY’07 it was recorded 1.23 times against 1.13 in FY’06 and 1.35 of industry average.

Inventory turnover days showed results almost in line with the industry where inventory days were 11.58 times., though the good results were found in FY’05 when the inventory days were recorded 11.58 as compare to 25.28 times and 28.21 times in FY’06 and FY’07 respectively. Somehow the stock was held long due to reduction in cement prices. [Appendix I, Financial Ratios & Appendix III, Graph-4](239)

Cash Flows:

Cash flow expresses the amount of actual cash that came into business and taken out of business in real terms. The cash flow statement can be examined to determine the short-term sustainability of a company.

During FY’07 Net cash flows showed very poor results as compare to its previous years. In FY’07 from net cash from operating activities was recorded PKRs. 431 million that was 80.62% lower over the last year and 26.57% lower against the industry average. The highest cash generated, over the three periods under review, was in FY 2006 amounted PKRs. 2,223 million and recorded 69% increase over the FY 2005. Major change was found with increase in advances, deposits, prepayments and other receivables amounted to PKR 789 million as compare to PKR 14 and PKR 21 million in FY’06 and FY’05 respectively.

Due to price war and industry position minimum investments were made in FY’07 and cash was tried to held in banks and generate in interest income on it to balance the profitability and maintain EPS figure. Net cash spent in investing activities was PKRs. 44 million in FY’07 that was 73% lower than FY’06.

Net cash used in financing activities was recorded PKR 950 million in FY’07 and PKR 1,742 million in FY’06 and only repaid long term finance PKR 550 million as compare to PKR 1,100 and PKR 3,870 million in FY’06 and FY’05 respectively. However PKR 820 million was generated from financing activities due to proceeds from long term finances of PKR 3,300 million. However as compare to the industry the Company’s financing was 21% lower.

Overall there was net decrease in cash and cash equivalents with PKR 563 million. However there was net decrease in cash and cash equivalents at the end of the FY’07 with 92% amounted PKRs. 47.6 million as compare to PKRs. 611 million in FY’06. The Company was lacking cash as it was trying to maintain its sales and profitability by giving credits to its customers and increase in advances, deposits, prepayments and other receivables. Its cash reserve of FY’06 allowed it to meet its obligations in FY’07. (351)

Long-term Solvency:

Solvency is the ability of a company to meet its long-term fixed obligations and to accomplish long-term expansion and growth. Companies that are financially insolvent move towards bankruptcy.

In the FY’07 net assets of FCCL were represented by 75.33% by the shareholders’ equity as compare to 66.57% and 48.83% in FY’06 and FY’05 respectively. These figures represents that the net assets of the Company are less financed by debt in FY’07 as compare to previous years. It tells that the company is strong in its solvency position. Normally 30-40% of the company’s net assets are financed by the debt is considered to be ideal though this percentage vary according to industries and other financial position of the companies. Company has the ideal position that allows it to get more debt when it needs and even it can also use it to increase its production capacity to meet the market requirements. However industry ratio recorded high debt finance over its equity finance for the FY 2007 and were also worst results against the Company.

In FY’07 total debt represented 53.76% of the total equity as compare to 59% in FY’06 and 75% in FY’06. One reason of this recovery in ratio was the consistent repayment of long-term finance. The Company also has a good solvency position against the industry average that was 88.97% in FY’07

Interest coverage position of the company was seen strong in FY’06 with 7.73 times of payment of its interest from its operating profits. However in FY’05 and FY’07 the results were more or less same with 4.31 times and 4.81 times recorded respectively the. The major reason for the decline on interest coverage was due to decline in profitability in FY’07. In FY 2007 interest coverage of the Company was also taken strong as compare to the industry average of 2.69 times.

Shareholders’ investment:

Earning Per Share (EPS) is the figure that represents the value that the shareholders derive for the share they hold in the company. It also represents the strength of the company in terms of its generating profits from its business.

In FY’06 EPS of the company recorded tremendous results in its history with PKRs. 3.25 per share. This figure increased 135.5% over the FY’05 in which it was PKRs. 1.38 per share. However in FY’07 EPS of the company declined with the trend of sales and profitability and recorded only PKRs. 1.74 per share. Overall the Company is generating value for its shareholders but due to change in price factors that hit on its sales and other operating expenses were the reasons for this decline. In FY’07 the Company’s results were also not strong against the industry where the industry average was PKR 3.49 per share and the company’s results were 50.14% lower than the industry.

There was not found any major change in net assets per ordinary share of the company almost generating consistent results for its shareholders. However the 1.71% fall was recorded in FY’06 from last year due to major decrease in tangible fixed assets and deferred tax assets and increase in current liabilities specifically in trade and other payables. Net assets per ordinary shares of the company were also recorded 82% lower than the industry average in FY’07. (232)

3.3.2 Risk Analysis:

Risk analysis is a broad term that is used in a number of different settings. In each instance, the term refers to the evaluation of the potential risk inherent in an upcoming transaction and the identification of several different options in how to proceed. Often, these options are designed to minimize the risk while obtaining the most benefit, or at least finding ways to protect you while taking the risk. [http://www.wisegeek.com/what-is-risk-analysis.htm](70)

Financial Risk and Management Objectives:

The Company finances its operations through equity, borrowings and management of working capital with a view to maintaining a reasonable mix between the various sources of finance to minimise risk. Taken as a whole, risk arising from the company’s financial instruments is limited as there is no significant exposure to market risk in respect of such instruments. (57)

Concentration of credit risk

All financial assets except cash in hand are subject to credit risk. Since major part of the Company’s sales is against advance payment, the Company believes that it is not exposed to major concentration of credit risk. To manage exposure to credit risk, the Company applies credit limits to its customers besides obtaining guarantees and by dealing with a variety of major banks and financial institutions. (66)

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises mainly where receivables and payables exist due to transactions with foreign buyers and suppliers. In case of the Company this risk results from outstanding import payments. These transactions are not covered through foreign exchange risk cover as exchange risk is not considered material. (67)

Liquidity Risk:

Liquidity risk is the risk that an enterprise will encounter difficulties in funds to meet commitments associated with financial instruments. The Company believes that it is not exposed to any significant level of liquidity risk. (35)

3.3.3 SWOT Analysis:

STRENGTH

• Strong group backing by Fauji Foundation having 45.8% shareholding.
• One of the premium brand in local market
• Highest retention rates in the market.
• One of the most technologically advanced plants in the industry.
• Strong brand recognition.
• ISO 14001:2004 and 9001:2000 Certified

WEAKNESSES

• The major player in the industry that did not undertake capacity expansions in 2007.
• Highest cost of expansion.
• Profitability is gradually declining.
• Market share is declining.
• In FY02 FCCL was exports leader with 14% of exports share. In FY07 it has 6.5% exports and expected to decline further.
• Burden of taxes.

OPPORTUNITIES

• Higher capacity utilization of 101.03% as compared to 81.04% of the industry in FY07
• Rising export market with exports showed an increase of 82.63% in FY07 over the last year.
• The Group (Fauji Foundation) helps the company (FCCL) in getting loans at low markup.

THREATS

• Increase in excise duty.
• Increase in coal cost.
• National & International Competitors.
• Local competitive expansions in capacity.
• Worldwide economical conditions.

3.3.4 Porter’s Five Forces:

Porter’s Five Forces is a framework for the industry analysis and business strategy development. The elements of Porter’s Five Forces model are the threat of substitute products, the threat of the entry of new competitors, the intensity of competitive rivalry, the bargaining power of customers and the bargaining power of suppliers. (51)

RIVALRY

• There are multiplayer in this industry and rivalry position is strong.
• Exit barriers
• Rate of industry growth is high as new development scheduled by the govt.
• Sustainable competitive advantage through improvisation and therefore rivalry
• position is strong for the medium term. (45)

SUPPLIER POWER

• There are multiplayer in this industry and competition is high and in such situation bargaining power of suppliers will be low.
• Switching costs of customers is low therefore supplier power is also low.
• Increased taxes, customs, excise duties and tariffs were levied by the government affects profitability and trading of the companies and to remain in industry they have to compromise with the prices that increase competition and decrease bargaining power of suppliers. (76)

BUYER POWER

• Prices are high and making buying power low – ultimately affects company’s profits.
• Burden of taxes and duties made the buyer power low.
• High Inflations created problems about consumer’s decisions and cement usage for residence purposes fall.
• Customer’s ability to bypass the supplier (or take over the supplier) is low and buyer power will also be low.
• Switching cost is low and buyer power is high in such instances. (74)

BARRIERS TO ENTRY

• Capital requirement is very high for new plant or expansions.
• Switching cost of customers is null or nominal.
• Scale of economies was difficult to achieve for new competitors.
• Differentiation of products is very less in this industry though quality can affect.
• New Distribution channels are difficult to establish and existing distribution channels are hard to access to. (62)

THREAT OF SUBSTITUTES

No substitute product of cement exist, though use of wood can be considered to build houses but not applicable for industrial purposes (buildings, bridges, malls, etc). (27)

3.3.5 Competitive Analysis:

Sales and Production:

During FY’07 FCCL production recorded 2251730 tons and was 55% lower than DGKC that is standing was at the leading ship in the industry with production 4976030 tons. However FCCL showed good results from MLCFL that had total production 1,390,250 tons at that time. Net sales of FCCL were 3463 million as compare 6420 million and 3711 million from its competitors DGKC and MLFCL respectively. However though MLFCL had lower production than FCCL it had good amount of net sale because of its total dispatches were in accord to its total production for the year. [Appendix V, Table & Graph 1](95)

Profitability:

In FY’07 FCCL recorded the second leading gross profit margin in the industry with margin 31.52% as compare to 31.65% and 8.35% by DGKC and MLFCL respectively. Major reason was the company’s control over its cost of sale as DGKC had almost doubled its sale than FCCL but gross profit margin difference was nominal. After tax margin of the company was recorded 18.66% as compare to 25.27 by DGKC and 1.13 by MLCFL. Here it seems that DGKC had much control over its operating expenses.

Debt to Equity:

FCCL showed good results in terms of its solvency position. FCCL’s debts represent 53.76% of the total equity as compare to DGKC that was also standing at the good solvency position with 40.18% debt over its equity. However MLCFL was financed most by the debt finance and its total debt represented 73.39% of its total equity. [Appendix VI, Table & Graph 3](56)

Earnings Per Share:

In FY’07 Earnings Per Share (EPS) of the company was recorded PKR 1.74 as compare to PKR 6.43 and PKR (0.03) by DGKC and MLFCL respectively. However EPS mainly depends on the level of profitability of the company and DGKC had good EPS because of its good results than FCCL. However MLCFL showed loss per share because of its operating loss for the year.

3.4 Future Outlook:

Keeping in view the growing demand of cement in future, Fauji Cement has decided to enhance its production capacity. For this purpose a complete new line of 7200 tons per day clinker will be installed parallel to the existing line. The salient aspects of the Project are given below:-

1. Agreements for supply of engineering and equipment have been signed with German Firms Polysius, Haver & Boecker, Loesche and Swiss Firm ABB.
2. The plant will be the biggest ever single line in Pakistan, and the equipment will comprise of the latest state of the art technology developed by leading foreign companies.
3. For the purpose of civil works, erection and local fabrication a contract has been awarded to M/s DESCON Engineering Lahore, who have a wide experience in such tasks.
4. Local fabrication and procurement have been encouraged to the maximum extent to utilize local sources to save on cost and foreign exchange.
5. The plant will start commercial production in early 2010 InshaAllah.

3.5 Conclusion:

Fauji Cement Company Limited is one of the big cement units in Pakistan. The Company remained profitable for the three years period. Sales and production dispatches of the company have been increased over the period and the company is getting continuous growth in its performance terms though due to generic change in cement price the company did not show good results in ‘FY’07. It has been standing good in industry for a long time but after recent production expansion by the Lucky Cement Limited and D.G Khan cement its market contribution has fallen to some extent. However in the recent FY’07 it still achieved very strong results as compare to the industry and its competitors in terms of profitability and gearing areas.

Fauji Cement Company Limited is a good contributor to the economy of the Pakistan with generating revenue from export of cement that also strengthens economy of the country. Its quality products made its brands well known across the global.

In FY’06 it achieved its ever highest results and enjoyed the market position with Net Sales PKRs. 4,286 million and after tax profit PKRs. 646 million. EPS of the company was recorded PKR 3.25 per share. Solvency position was getting strong and shareholders’ value was recorded well at that time with PKR 1.50 dividend per share. Returns from its resources also recorded good results with 19.42% Return on Assets and 36.67% Return on Equity. This was a stable year for market with good cement prices and control over the cost of production as furnace oil and coal prices were not as higher as they are in current periods.

Though the results of the company in FY’07 were not good as they were in the previous FY’ 06 the Company had been working at good position and still standing with strengths in the market. However the results changed with declining trend in FY’07. The major reason for the adverse results was the price war within the industry, government levies, increase in cost of production/sale due to high prices of coal and fuel consumption, new production lines by its competitors and overtaking high market shares. Moreover the company also made high credit sales to make growth in sale and profit but resulting lack in cash.

However in FY’07 production though the production increased from 2123017 tons to 2251730 tons sales fall from PKR 4286 million to PKR 3463 million. However the results were better from the FY’05 where PKR 2845 millions of sales was generated from 1763195 tons production. Profitability was and returns were also lower than FY’06 after taking same adverse affects. There was a very low amount of cash available to meet the short term requirements though the company maintained its gearing position. However earning per share was still not so bad with PKR 1.74 per share. The performance of the company was not loose in FY’07 but the results were lower from the previous year due to general effects by the industrial and economical factors.